Securities & Investment Disputes
My Company Is Being Sued by an Investor. Defense Strategy
Draft for attorney review
Short answer
Treat the first two weeks as the most valuable. Preserve every document and message about the raise, notify the directors-and-officers insurer in writing, and read the petition against the statutes it invokes: the Texas Securities Act, statutory fraud, Rule 10b-5, fiduciary duty. Then test three things before answering: whether an arbitration clause or a federal claim changes the forum, whether each claim is inside its deadline, and which statutory defenses fit, such as that the investor knew the truth, that the company could not have known it with reasonable care, or that a valid exemption covered the sale. A compliant rescission offer can sometimes end the exposure.
The first two weeks
Three things happen immediately, before anyone decides how to answer.
- Litigation hold. Suspend deletion of emails, texts, Slack or Teams messages, drafts of the deck and memorandum, cap tables, bank records and board materials, for the company and for every officer who used a personal device for company business. Spoliation findings in Texas can cost a defendant the case regardless of its merits.
- Insurance notice. Most directors-and-officers policies are claims-made and require prompt written notice; late notice is a common reason coverage is denied. Send the petition to the broker and carrier now, and ask about the retention and whether defense costs erode the limit.
- Map the claims to the statutes. Investor suits in Texas usually plead some mix of the Texas Securities Act (Government Code sections 4008.051 and 4008.052), statutory fraud under Business and Commerce Code section 27.01, common-law fraud and negligent misrepresentation, breach of fiduciary duty, breach of the subscription or shareholder agreement, and sometimes federal Rule 10b-5. Each has different elements, defenses and deadlines, and the defense is built claim by claim.
Who has been named, and who should be
Investor petitions often name the company, the founders and sometimes the board. Under Texas Government Code section 4008.055 anyone who controlled the seller is jointly and severally liable unless he proves he did not know and could not have known the facts with reasonable care, so individual exposure is real and the interests of the company and its officers may diverge. Check the bylaws or operating agreement for indemnification and advancement of defense costs, and consider early whether one lawyer can represent everyone. The separate exposure of officers is covered in the control-person and aider guide.
Forum and deadlines
Before the answer is due, check the subscription agreement for an arbitration clause and a governing-law clause. A valid clause can move the case out of the Dallas County courts into private arbitration, which changes discovery and removes the jury; whether that helps the company is a judgment call. If the petition includes a federal securities claim filed in state court, removal to federal court may be available, and if the case is already in federal court under Rule 10b-5, the Private Securities Litigation Reform Act gives the company a mandatory discovery stay while a motion to dismiss is pending and requires the investor to plead facts creating a strong inference of scienter. Large commercial disputes may also qualify for the Texas Business Court; see which cases qualify.
Then run every deadline. Under section 4008.062, a registration claim must be filed within three years of the sale; a misstatement claim within three years of discovery and no more than five years of the sale. Statutory fraud, common-law fraud and fiduciary claims carry four years under Civil Practice and Remedies Code section 16.004. Federal fraud claims run two years from discovery and five from the violation. An investor who was told of the problem in an update three years ago may be out of time on the Texas misstatement claim even if the suit feels fresh.
The substantive defenses
| Claim | What the investor must show | The company's main answers |
|---|---|---|
| Untrue statement, § 4008.052 | A sale by means of a materially untrue statement or misleading omission; no intent required | The statement was true or not material; the investor knew the truth; the company did not know and could not have known with reasonable care (not available to an issuer for its own prospectus or sale documents); limitations; a compliant rescission offer |
| Unregistered sale, § 4008.051 | A sale without a permit, registration or exemption, or by an unregistered dealer or agent | The offering met Rule 506 and was a covered security; a Texas exemption applied; three years have passed; a compliant rescission offer |
| Statutory fraud, § 27.01 | False representation of fact or false promise, made to induce the contract, relied on | No false representation of past or existing fact; no reliance; for exemplary damages, no actual awareness |
| Rule 10b-5 | Misstatement, scienter, reliance, loss causation, pleaded with particularity | Motion to dismiss for failure to plead scienter or loss causation; discovery stay; two- and five-year limits |
| Fiduciary duty | A duty, a breach, and injury to the company or the investor | The claim belongs to the company and must be brought derivatively; the challenged act was authorized by the governing documents or approved after disclosure |
Two patterns recur. First, investor petitions often treat a projection that did not come true as a misstatement; a forecast made in good faith with a reasonable basis is not an untrue statement of fact under Texas or federal law, and the record of how the projection was built becomes the center of the defense. Second, petitions often plead fiduciary claims that belong to the company rather than the investor; those can be dismissed or forced into a derivative posture with its own procedural requirements.
Example
Suppose a Plano medical device company raised $2 million under Rule 506(b) in 2023 and is sued in 2026 by an investor who alleges that the memorandum overstated the stage of FDA review and that the founders paid themselves unapproved bonuses. The hold goes out and the carrier is notified in the first week. The subscription agreement has no arbitration clause, so the case stays in Dallas County. The FDA statement is checked against the regulatory file: if the memorandum said "510(k) submitted" and the submission went in two weeks after the raise, the company has a problem on section 4008.052 and should price a rescission offer. The bonus claim is a derivative claim that the investor has pleaded directly; the company moves to dismiss it in that form. The investor's own updates from 2023 showed the submission date, so the company also pleads limitations on the misstatement claim.
The rescission offer as a strategic tool
Texas Government Code section 4008.058 lets a seller make a formal rescission offer to buyers. If the offer meets every statutory requirement, including funds in escrow or an unqualified bank commitment, the required disclosures and a conspicuous statement of the buyer's rights, then a buyer who does not reject it in writing within 30 days, expressly reserving the right to sue, loses the Texas Securities Act claim, and one who rejects has one year to file. For a company whose offering had a disclosure or exemption defect, an offer to all buyers can convert an open-ended lawsuit into a fixed liability: the price paid plus legal interest, less distributions, with costs and fees excluded. The offer must be drafted precisely and funded; a defective offer gives the investor a new document to attack.
Communications while the case is pending
Say nothing about the lawsuit to the investor who sued, except through counsel. Be careful with other investors: an update that characterizes the claims, promises an outcome or reassures them about the company's finances is itself a statement in connection with their securities and can become the next claim. Factual, reviewed updates are fine; advocacy is not. Public statements, social media and comments to the press should be cleared the same way. The general guidance on keeping a business dispute confidential applies here with added force.
Settlement and when to involve a litigator
Many investor disputes resolve once the forum, the deadlines and the strength of the statutory defenses are clear to both sides, and mediation is routinely ordered in Dallas County courts. The time to bring in a litigator is the day the petition arrives, because the hold, the insurance notice and the deadline analysis cannot wait for the answer date, and a rescission offer is most useful before positions harden. Tina Wysk defends companies, founders and boards in investor lawsuits in Dallas state and federal courts and in arbitration; see securities and investment disputes and how to reach her.
Questions on this topic
Will our directors-and-officers insurance cover an investor lawsuit?
Often, subject to the policy's terms. D&O policies commonly cover securities claims by investors against the company and its officers, but they are claims-made, require prompt written notice, carry a retention the company pays first, and frequently exclude fraud once it is finally adjudicated and claims brought by major shareholders or insiders. Defense costs usually count against the limit. Read the policy and give notice in the first week.
Can the founders be held personally liable to an investor?
Yes. Under Texas Government Code section 4008.055, a person who controlled the seller is jointly and severally liable with the company unless he proves he did not know and could not have known the facts with reasonable care. Founders are also personally liable for their own fraud and fiduciary breaches. Indemnification and advancement provisions in the bylaws or operating agreement, and D&O coverage, determine who actually pays the defense.
Should the company make a rescission offer?
It depends on whether the offering had a real defect and whether the company can fund the offer. Under section 4008.058 a compliant offer, with escrowed funds or a bank commitment, fixes the company's Texas Securities Act exposure at the price paid plus legal interest less distributions, and cuts off buyers who do not reject it properly within 30 days. It does not resolve common-law fraud or federal claims. It is a decision made with counsel and the carrier, not a form letter.
Can we tell our other investors about the lawsuit?
Yes, carefully. Factual, counsel-reviewed updates are appropriate and sometimes required by the investors' rights agreement. Statements that characterize the plaintiff's claims, predict the outcome or reassure investors about the company's condition are statements in connection with their securities and can become the basis for new claims under the Texas Securities Act or Rule 10b-5. Treat every investor communication during the case as a potential exhibit.
What if the investor's projections claim is really about a forecast that missed?
A projection made in good faith with a reasonable basis and disclosed as a projection is not an untrue statement of fact under Texas or federal law. The defense turns on the record: the assumptions, the data behind them, who prepared them and what cautionary language accompanied them. A projection the company knew was unreachable when it was made is a different matter and can be a misstatement under Government Code section 4008.052 and a false promise under Business and Commerce Code section 27.01.
Sources
- Tex. Gov't Code ch. 4008 (§§ 4008.051, 4008.052, 4008.055, 4008.058, 4008.062) (primary claims and their defenses, control-person liability, rescission offer requirements and effect, limitations)
- Tex. Bus. & Com. Code § 27.01 (statutory fraud in stock transactions: false representation or promise, actual awareness for exemplary damages)
- Tex. Civ. Prac. & Rem. Code § 16.004 (four-year limitations for fraud and breach of fiduciary duty)
- 15 U.S.C. § 78u-4(b) (PSLRA) (heightened pleading, mandatory dismissal and discovery stay in federal securities fraud cases)
- 28 U.S.C. § 1658(b) (federal securities fraud deadlines: two years from discovery, five years from violation)
Legal sources last checked November 6, 2026. Statutes and rules change; the date matters.
About the author
Tina Wysk
Shareholder, Hallett & Perrin, P.C.. Tina represents businesses and individuals, as plaintiffs and defendants, in contract, partnership, fiduciary duty, fraud, construction, trade secret and investment disputes in Texas state and federal courts and in arbitration.
About TinaThis guide is general information about Texas and federal law for business owners, not legal advice about your situation. Statutes, rules and court decisions change, and small facts change outcomes. Reading it or contacting Tina Wysk through this site does not create an attorney-client relationship.
