Summary
In discounting prospects for "winning in court" in litigation arising from losses in the mortgage market, the NYT unfortunately ignores a growing, and perhaps ultimately the primary, form of non-class action private securities litigation--litigation under state securities laws, which generally impose far lower evidentiary burdens on private plaintiffs than federal law. State law securities litigation first began to increase after Central Bank v. First Interstate Bank, 511 U.S. 71 (2006) rejected the validity of "aiding and abetting" securities fraud claims under Rule 10-b5. Although Congress, by passing the Private Securities Litigation Reform Act of 1995 (PSLRA) and the Supreme Court, in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71 (2006) have largely foreclosed class actions under state securities, claims by individual plaintiffs under state securities have, and almost certainly will, continue to grow at an increasing rate.
Analysis
Three key differences between state and federal securities laws help explain the trend.
First, and perhaps most significantly, the Uniform Securities Act, which has been adopted (in various forms) by numerous states, expressly provides for vicarious (and/or "aiding and abetting" liability) of directors, partners, etc. and others who "materially aid" the conduct giving rise to liability. In contrast to claims under federal Rule 10-b5, moreover, the Uniform Securities Act places the burder on the defendant to prove that he or she "did not know and, in the exercise of reasonable care could not have known of the conduct by reason of which the liabiltiy is alleged to exist." Uniform Securities Act of 2002 (the "Uniform Act"), Sec. 509(g). Indeed, the Supreme Court recognized this distinction in Stoneridge Investment Partners LLC v. Scientific-Atlanta, --- S.Ct. ----, 2008 WL 123801, at *11 (U.S. Jan. 15, 2008)(" “Some state securities laws permit state authorities to seek fines and restitution from aiders and abettors.”) See, e.g. Houston v. Seward & Kissel, LLP Slip Copy, 2008 WL 818745 (S.D.N.Y. March 27, 2008)(Holding the Oregon law allows for "aiding and abetting" claim against law firm involved in securities offering).
Second, whereas the plaintiff bears the burden of proving that he or she reasonably relied upon a misrepresentation to establish a claim under 10b-5, the majority of courts considering the matter under various state implementations of the Uniform Securities Act have held that proof of reliance is not required. Instead, a plaintiff need only show that he or see did not know that that representation was false. See, Uniform Act Sec. 509(b)(requiring only that proof that "purchaser not kno[w] the untruth or omission.) See, e.g., Kronenberg v. Katz, 872 A.2d 568 (Del. Ch. 2004)(Holding that that a securities fraud claim under the Pennsylvania version of the Uniform Act does not require the Plaintiff to prove reliance or scienter).
Third, again in contrast to Rule 10-b5, the Uniform Act does not require a plaintiff to prove the defendant acted with "scienter" (i.e. intent to engage in actions contrary to law). See, Uniform Act, Sec. 509(b) (requiring the "seller" of a security to "sustain the burden of proof that the seller did not know and, in the exercise of reasonable care, could not have known of the untruth or omission."). Id.
The foregoing standards suggest that state securities laws may provide fodder for significant litigation related to the problems in the mortgage market. (Note: state laws implementing the uniform act commonly include a broad definition of a "security" that encompasses "a note; stock; treasury stock; security future; bond; debenture; evidence of indebtedness; certificate of interest or participation in a profit-sharing agreement; collateral trust certificate; preorganization certificate or subscription; transferable share; investment contract; voting trust certificate; certificate of deposit for a security; fractional undivided interest in oil, gas, or other mineral rights; put, call, straddle, option, or privilege on a security, certificate of deposit, or group or index of securities, including an interest therein or based on the value thereof, etc...."). Although securities class action often receive the most publicity and notoriety, the magnitude of individual losses related to the mortgage market may themselves generate a large volume of costly litigation.
