Thought Leadership

How to Calculate Securities Fraud Class Size with SEC Data

By:  Joseph W. Thompson, CFA, ASA, David J. Neuzil, CFA, ASA, and Paul L. Skluzak

Many SEC Rule 10b-5 (“10b-5”) actions relate to investor lawsuits whereby certain shareholders claim they paid an inflated price for a security due to fraud by the issuing company. There is belief that 10b-5 actions may surge from COVID-19 related disclosures.

In class action matters, estimating the shares that were net purchased at the inflated price (the “Class”) is challenging. Two commonly applied methods for calculating the shares in the Class for 10b-5 claims are the Single-Trader and Multi-Trader Models (together the “Trader Models”), which have been criticized by various courts and academic theorists.

This article provides a methodology for (i) calculating the shares, at a minimum, that are part of the Class and (ii) refining the shares/trading volume inputs of the Trader Models using SEC Form 13F and 13D-G filings in calculating additional shares in the Class.

Click here to read the full article [pdf].