Federal courts in the United States saw more securities class actions filed in 2016 than in any year since the 1995 passage of the Private Securities Litigation Reform Act (PSLRA).1 Although the number of federal securities class actions has risen for several consecutive years, the 41% increase from 2015 to 2016 was unusually sharp, especially amid superior market performance.2 Among many other factors contributing to this trend, claims against foreign issuers listed on US exchanges have become increasingly frequent.3 Israeli companies have proven an especially popular target, accounting for nearly 20% of all such lawsuits against foreign issuers in 2016. Younger and mid-cap issuers based outside the US are sometimes uniquely vulnerable to federal securities lawsuits for a variety of reasons, including: the complex US regulatory and disclosure regime for publicly listed companies; market confusion about how to reconcile domestic filings in the issuer’s home country and US regulatory filings; and sophisticated attacks from short-sellers looking to drive down a company’s stock price for profit.
Broadly speaking, US securities laws prohibit issuers from knowingly making materially misleading statements (and, where the law imposes a duty to disclose, omissions) in their public statements and filings. Purchasers who are adversely affected by misleading statements or actionable omissions can bring suits to recover their damages against the issuer and its principals, and these cases are typically pursued as class actions—almost always on the heels of announcements that lead to a decline in stock price. To recover, a suing purchaser, generally, must prove (1) that the defendant made a material misrepresentation, (2) with scienter (i.e., intent to deceive), (3) in connection with the sale or purchase of a security, (4) that the plaintiff justifiably relied on the misrepresentation in choosing to purchase or sell the security at a particular price, (5) suffered an economic loss, and (6) that the plaintiff’s loss was caused by the misrepresentation.4 With few exceptions, the federal securities laws apply to all transactions on domestic exchanges, whether the issuer is based in the United States or elsewhere.5
As federal securities class actions against Israeli issuers increase, so too will the importance of understanding US securities laws and taking steps to mitigate litigation risk.