Rupert Murdoch, his son, James Murdoch, Rebekah Brooks and News Corporation allegedly "knew or were reckless in not knowing that reporters from News of the World were using illegal means to gather news". In an effort to keep the problem in the box, they maintained that a single rogue reporter had been responsible for the phone hacking. They knowingly or recklessly engaged in a course of conduct to disseminate materially false and misleading information about News Corp, including the truth about the magnitude of the illegal activities.

During the class period, defendants engaged in actions which deceived the market for News Corp stock and engaged in a course of conduct that artificially inflated the price of News Corp stock. Had plaintiffs known the truth, they would not have purchased News Corp stock or would not have purchased them at the artificially inflated prices that were paid.

This is the crux of the class action lawsuit filed in the Federal Courts of New York on behalf of persons who purchased News Corp stock between 3 March 2011 and 11 July 2011, alleging violations of Sections 10(b) and 20(a) of the U.S. Exchange Act of 1934 and SEC Rule 10b-5, which prohibit the making of material misstatements or omissions or engaging in any course of business that operates as a fraud against any person in connection with the purchase or sale of a security.

Prior to 1995, there was a common perception that class action securities lawsuits were being frivolously filed upon the mere announcement of corporate bad news. To address this problem, U.S. Congress passed the Private Securities Litigation Reform Act of 1995, known as 'PSLRA', which sets high pleading standards for federal securities fraud claims.

Plaintiffs are now required to prove that defendants made misrepresentations or omissions of material fact with a culpable state of mind (known as scienter), knowing that they were acting illegally and intending to do so, and that such misrepresentations or omissions caused the plaintiff the alleged loss. In proving such culpable state of mind, the plaintiff must at least show that it was as likely that the defendant had fraudulent intent.

In the News Corp case, it may come down to whom to believe. Will the Court believe the tabloid's former editor and former lawyer, who claim that they told James Murdoch in 2008 about evidence suggesting that the phone hacking extended beyond one reporter? Or will the Court believe James Murdoch, who said he only became aware of this in late 2010?

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Some courts have held that a defendant's recklessness, coupled with a motive to defraud, is sufficient to establish the culpable mind requirement, while other courts have found this to be insufficient to establish liability on its own, although it may be a factor in determining it.Even if the plaintiffs in the class action are unable to demonstrate that the Murdochs' acted with a culpable mind, the case against them may still stick.

This is because Section 20(a) of the U.S. Exchange Act of 1934 imposes liability on any person who controls any other person, who acted with a culpable mind; even if the controlling person himself did not.

For this purpose, 'control' means the possession of power to direct the management of the company through the ownership of voting securities or otherwise. Accordingly, shareholders and directors can be held responsible for the fraudulent misrepresentations and omissions of persons they control. Although there is no explicit culpable mind requirement to hold a controlling person responsible for the fraudulent activities of others, some courts require the plaintiff to prove that the controlling person was a 'culpable participant' in the controlled person's conduct in order for liability to attach under Section 20(a).

In the class action, it is alleged that the Murdoch's, as controlling persons and through active participation in the day‑to‑day operations of News Corp, had the power to influence and control the content and dissemination of the various misleading statements. They had, it is alleged, unlimited access to copies of the News Corp's reports, press releases and other public filings and had the ability to prevent the issuance of misleading statements and the power to cause them to be corrected.

One of the difficulties class action plaintiffs face is gathering sufficient prima‑facie evidence to prove their case initially without the ability to conduct 'discovery' or embark on a fishing expedition. This is because the PSLRA provides that no 'discovery' may commence while a motion to dismiss the class action is pending. It is standard procedure for defendants to file motions to dismiss class actions for failing to plead the alleged fraud with sufficient particularity as required by the PSLRA. Accordingly, in the initial stages, plaintiffs must rely on their own investigations, forensic accountants, interviews with former employees and other experts to initially build the class action case.

Class action cases, like the one filed against the Murdochs' are usually settled before going to trial. Often the settlements are paid out by the relevant insurers, so that although the defendants may walk away with tarnished reputations, their pockets remain full. Since the Enron debacle, however, plaintiffs have begun to insist that directors and officers contribute out of their own pockets to the settlements.

Another recent development in the settlement of class actions are court orders which oblige the defendants to take various steps to enhance corporate governance. These have included revising the composition of the board of directors, allowing investors to nominate alternative candidates to the board and separating the CEO and Chairman functions.

Because of the heightened pleading requirements of the PSLRA, it has become more difficult for plaintiffs to successfully litigate a securities fraud claim. However, given the background of taxpayer funded bailouts of financial institutions and the perception of Wall Street greed, jurors may well be skeptical of corporate defendants in a securities claim and tilt the delicate scales of evidence in favour of fraud over negligence.

Raphael Grunfeld is a partner at Carter Ledyard & Milburn LLP, New York.