15 U.S.C. § 78u–4 — Private securities litigation

(a) Private class actions (1) In general. These rules apply to every private lawsuit under this chapter that is brought as a class action under the Federal Rules of Civil Procedure. (2) Certification filed with complaint. (A) Each person seeking to represent the class must personally sign a sworn certification, filed with the complaint, that: (i) says they reviewed and authorized the complaint; (ii) says they didn't buy the security at their lawyer's direction, or just so they could sue; (iii) says they're willing to serve as class representative, including testifying at deposition and trial; (iv) lists all their trades in the security during the class period; (v) names any other case in the last 3 years where they sought to represent a class; and (vi) says they won't accept payment beyond their fair share of any recovery, except what the court approves under paragraph (4). (B) Signing this certification does not waive the attorney-client privilege. (3) Appointment of lead plaintiff. (A) Early notice. Within 20 days of filing, the plaintiff must publish a notice in a widely read national business publication or wire service, telling potential class members about the case, the claims, and the class period, and telling them that within 60 days they can ask the court to be appointed lead plaintiff. If several similar lawsuits are filed, only the first one has to publish this notice. It's in addition to any notice already required under the Federal Rules of Civil Procedure. (B) Appointment. (i) Within 90 days after the notice is published, the court considers any motion from a class member seeking to be lead plaintiff — even someone not named in the complaint — and appoints whichever member or members the court decides are best able to represent the class (the "most adequate plaintiff"). (ii) If several related class actions have been filed and someone has asked to consolidate them, the court waits until it rules on consolidation before appointing a lead plaintiff, and then appoints one lead plaintiff for the whole consolidated case. (iii) The court presumes the most adequate plaintiff is whoever (I) filed the complaint or responded to the notice, (II) has, in the court's judgment, the largest financial stake in the case, and (III) otherwise meets the class-representative requirements of Federal Rule of Civil Procedure 23. A class member can defeat that presumption only by proving the presumed lead plaintiff either won't fairly and adequately protect the class, or has unique legal defenses that make them a bad fit to represent it. (iv) A plaintiff can only get discovery on who the best lead plaintiff is after first showing a reasonable basis to believe the presumed lead plaintiff can't adequately represent the class. (v) The lead plaintiff picks the lawyer for the class, subject to the court's approval. (vi) Unless the court allows otherwise, no one may serve as lead plaintiff — or as an officer, director, or fiduciary of a lead plaintiff — in more than 5 securities class actions during any 3-year period. (4) Recovery by plaintiffs. On a per-share basis, the lead plaintiff must recover the same share of any judgment or settlement as every other class member. This doesn't stop the court from awarding the lead plaintiff reasonable costs and expenses — including lost wages — directly tied to representing the class. (5) Restrictions on settlements under seal. A class-action settlement can't be filed under seal, except that the court may seal specific parts of it, on a party's motion, if publishing that part would cause direct and substantial harm to a party. (6) Restrictions on attorneys' fees and expenses. The total attorneys' fees and expenses the court awards to class counsel can't exceed a reasonable percentage of the damages and prejudgment interest actually paid to the class. (7) Disclosure of settlement terms to class members. Any proposed or final settlement shared with the class must include a cover page summarizing, and the following statements: (A) the total settlement amount, in the aggregate and as an average per share; (B) a statement about the potential outcome of the case — (i) if the parties agree on the average per-share damages a plaintiff could have recovered by winning, they state that figure; (ii) if they disagree, each side explains what they disagree about; (iii) neither statement can be used as evidence in any other court or agency case; (C) what attorneys' fees or costs are being sought, by whom, how much (including a per-share average), and a brief explanation why, clearly summarized on the cover page; (D) the name, phone number, and address of class counsel who can answer questions; (E) a brief explanation of why the parties are proposing the settlement; and (F) anything else the court requires. (8) Security for payment of costs in class actions. The court may require the class's attorneys, the class, or both — or the defendant's attorneys, the defendant, or both — to post security, in whatever proportions and at whatever times the court finds fair, to cover fees and expenses that might be awarded. (9) Attorney conflict of interest. If class counsel personally owns, or otherwise has a financial interest in, the securities at issue in the case, the court must decide whether that ownership or interest is a big enough conflict of interest to disqualify that attorney from representing the class. (b) Requirements for securities fraud actions (1) Misleading statements and omissions. If the plaintiff claims the defendant made an untrue statement of material fact, or left out a material fact needed to keep other statements from being misleading, the complaint must specify each statement claimed to be misleading, why it's misleading, and — for any allegation made "on information and belief" — every fact the plaintiff relies on for that belief, stated with particularity. (2) Required state of mind. (A) In general. Except as provided in (B), if the plaintiff can win money damages only by proving the defendant acted with a particular state of mind, the complaint must state, for each violation alleged, particular facts giving rise to a strong inference that the defendant had that state of mind. (B) Exception. In a money-damages case against a credit rating agency or a controlling person, it's enough for the complaint to state particular facts giving a strong inference that the credit rating agency knowingly or recklessly (i) failed to reasonably investigate the rated security using the factual elements its own rating methodology relies on, or (ii) failed to reasonably verify those factual elements using sources the agency considered competent and independent of the issuer and underwriter (verification can be based on a sampling technique short of a full audit). (3) Motion to dismiss; stay of discovery. (A) The court must dismiss the complaint, on a defendant's motion, if the requirements of paragraphs (1) and (2) aren't met. (B) While a motion to dismiss is pending, all discovery and other proceedings are paused, unless the court finds that a party needs specific, limited discovery to preserve evidence or avoid undue prejudice. (C) Preservation of evidence. (i) During a discovery pause, any party who has actual notice of the complaint's allegations must preserve relevant documents, data (including electronic data), and other objects in their control, as if a formal request for those documents were already pending. (ii) A party harmed by another party's willful failure to do this can ask the court for appropriate sanctions. (D) A court may also pause discovery in a related state-court case, when necessary to protect its own jurisdiction or to enforce its own judgments in a case subject to this discovery stay. (4) Loss causation. The plaintiff has the burden of proving that the defendant's violation actually caused the loss the plaintiff is trying to recover. (c) Sanctions for abusive litigation (1) Mandatory review by court. When a private lawsuit under this chapter reaches final judgment, the court must include in the record specific findings on whether every party and every attorney complied with Federal Rule of Civil Procedure 11(b) — which bars frivolous filings — for every complaint, response, and dispositive motion. (2) Mandatory sanctions. If the court finds a violation of Rule 11(b), it must impose sanctions under Rule 11, but must first give the violating party or attorney notice and a chance to respond. (3) Presumption in favor of attorneys' fees and costs. (A) The court presumes the right sanction is: (i) for a response or dispositive motion that violates Rule 11(b), an award to the other side of the reasonable fees and expenses directly caused by the violation; and (ii) for a complaint that substantially violates Rule 11(b), an award to the other side of its reasonable fees and expenses for the whole case. (B) That presumption can be defeated only by proof that (i) the fee award would be an unreasonable, unjust burden, and skipping it wouldn't burden the other side more, or (ii) the violation was minor ("de minimis"). (C) If the party or attorney meets that burden, the court instead awards whatever sanction it decides fits under Rule 11. (d) Defendant's right to written interrogatories In a private money-damages lawsuit, if a defendant asks, the court must give the jury a written question asking about that defendant's state of mind at the time of the alleged violation. (e) Limitation on damages (1) In general. Except as in paragraph (2), if a plaintiff's damages are measured against the security's market price, the damages awarded can't exceed the difference between what the plaintiff paid or received for the security and the security's mean trading price during the 90 days starting when the information correcting the misstatement or omission reached the market. (2) Exception. If the plaintiff sells or buys back the security before that 90-day period ends, damages instead can't exceed the difference between what the plaintiff paid or received and the security's mean trading price from right after the correction until the date the plaintiff actually traded. (3) "Mean trading price" is defined as the average of the security's daily trading price, measured at market close each day, over the relevant period. (f) Proportionate liability (1) Applicability. Nothing here changes the underlying legal standard for who is liable in a securities case. (2) Liability for damages. (A) Joint and several liability. A defendant ("covered person") is liable for the whole judgment, jointly with others, only if the jury (or the judge, without a jury) specifically finds that person knowingly violated the securities laws. (B) Proportionate liability. Otherwise, a covered person is liable only for the share of the judgment matching their own percentage of responsibility, as determined under paragraph (3). If a contract allows it, a covered person who wins the case can recover their own attorneys' fees and costs. (3) Determination of responsibility. (A) The court must have the jury answer special questions — or, without a jury, make its own findings — about each covered person and everyone else claimed to have caused or contributed to the plaintiff's loss, including people who already settled: whether they violated securities law, their percentage of responsibility (as a share of everyone's total fault), and whether they violated it knowingly. (B) Those answers or findings must state the total damages the plaintiff can recover and each covered person's percentage of responsibility. (C) In setting those percentages, the fact-finder considers the nature of each person's conduct, and how directly that conduct caused the damages. (4) Uncollectible share. (A) If, on a motion filed within 6 months of final judgment, the court finds part of a covered person's share of the judgment can't be collected from them, and also can't be collected from anyone who is jointly and severally liable as a knowing violator, then each proportionately liable covered person must help cover that uncollectible share: (i) they're jointly and severally liable for it if the plaintiff is an individual whose recoverable damages equal more than 10 percent of their net worth, and their net worth is under $200,000; (ii) for any other plaintiff, each covered person instead pays their proportionate share of the uncollectible amount, but never more than 50 percent of their own original share; (iii) "net worth" here is measured as of just before the plaintiff bought or sold the security, as the fair market value of assets minus liabilities, including real estate and personal property. (B) The total extra payments required under (A) can never exceed the amount that's actually uncollectible. (C) A covered person whose own share isn't collectible can still be sued for contribution, and remains liable to the plaintiff on the judgment. (5) Right of contribution. A covered person who has to make one of these extra "uncollectible share" payments can seek reimbursement from (A) the person originally liable to pay it, (B) any person who is jointly and severally liable as a knowing violator, (C) any other proportionately liable person who has paid less than their fair share, or (D) anyone else responsible for the underlying conduct. (6) Nondisclosure to jury. The jury is never told about this system for allocating damages or reallocating uncollectible shares. (7) Settlement discharge. (A) A covered person who settles before a final verdict or judgment is fully released from every future contribution claim by other defendants, and can't bring contribution claims of their own against anyone else — except someone whose liability the settlement also resolved. The court enters a bar order making this final. (B) If a covered person settles before final judgment, the judgment against everyone else is reduced by whichever is larger: that person's percentage share of responsibility, or the amount they actually paid. (8) Contribution. A covered person who ends up jointly and severally liable can seek contribution from anyone else who would have been liable for the same damages if they'd been part of the case, based on each person's share of responsibility. (9) Statute of limitations for contribution. A contribution claim must be filed within 6 months after the judgment becomes final and unappealable — or, for an extra "uncollectible share" payment under paragraph (4), within 6 months after that payment is made. (10) Definitions. (A) A covered person "knowingly commits a violation of the securities laws": (i) in a false-statement or omission case, if they made the statement (or omission) knowing it was false or misleading, and people were likely to actually rely on it; or (ii) for other conduct, if they engaged in it knowing the facts that made it a violation. (B) Merely reckless conduct doesn't count as "knowing." (C) "Covered person" means a defendant in a private action under this chapter, or a defendant sued under section 77k of this title who is an outside director of the issuer. (D) "Outside director" is defined by SEC rule or regulation.