Our Work in Securities Litigation
Securities fraud, though taking many forms, generally involves deceptive practices used to artificially inflate (or depress) the price of a security, entice investors to make decisions to purchase or sale investments, or manipulate the market for a given security. Originally, securities fraud protection came from the states in blue sky laws (starting in 1911) enacted to regulate the offering and sale of securities. However, the blue sky laws were often ignored or by-passed without a consistent federal standard. Corporate abuses over the sale of securities were a primary factor leading to the crash of the stock market in 1929. The United States Securities and Exchange Commission (SEC) was established in 1934 to enforce the federal securities laws and regulate the securities industry. The SEC seeks to prevent securities fraud by regulating the stock market, sale of securities, and corporate reporting.
Congress first passed the Securities Act of 1933 in order to increase public trust in capital markets. Also known as the “Truth in Securities Act” or “Federal Securities Act,” the Securities Act of 1933 requires uniform disclosure of information about public securities offerings. Originally enforced by the Federal Trade Commission until the SEC was created in 1934, the Securities Act of 1933 requires companies to register interstate distribution of securities. The registration allows potential investors to have basic financial information about issuing companies’ and securities’ risks.
A year later, Congress passed the Securities Exchange Act regulating secondary trading of securities; that is, trading between individuals and companies not involving the original security issuers. The 1934 Act spawned the SEC. The SEC’s authority and oversight was expanded by later acts, including the Trust Indenture Act of 1939, the Investment Act of 1940, the Investment Advisers Act of 1940, the Sarbanes-Oxley Act of 2002, and the Credit Rating Agency Reform Act of 2006. The SEC includes five commissioners with terms staggered so that one commissioner’s term ends on June 5 each year. While the commissioners are politically appointed by the President of the United States, no more than three may be from the same political party. One of the five commissioners is appointed Chairman. In 1934, President Franklin Delano Roosevelt appointed Joseph P. Kennedy, Sr. as the SEC’s initial Chairman.
Securities fraud is found in many forms. Some of the more common forms of securities fraud are described below:
- Accountant fraud occurs when public accounting firms falsify or recklessly disregard false financial reports on behalf of their corporate clients leading to a false impression of the company’s financial status. The price of the company’s securities is affected by the false financial reports and represents a form of securities fraud.
- Insider trading is the exchange of stocks or other securities by those with non-public information about a company. Originally the definition referred to trading done by company officers, directors, and owners of more than 10 percent of a class of securities. The definition has become more expansive in application and may refer to any individual who knowingly trades securities based on non-public information violating the corporation’s trust to shareholders. The violation of trust to corporate shareholders—someone with non-public information breaches a fiduciary responsibility to company shareholders—is the key issue in affecting whether illegal insider trading has occurred.
- Internet securities fraud, a form of market manipulation, is usually found in “pump-and-dump” schemes. Pump-and-dump schemes involve placing false and/or fraudulent information on the Internet with the purpose of influencing the price of securities. For example, information is disseminated positively influencing the prices of a stock that is then dumped by investors responsible for the false and/or fraudulent information before the price falls to lower levels. The investors’ profit is derived by manipulating the price of stocks with fraudulent information.
- Microcap securities fraud involves stocks with a market capitalization under $250 million that are generally traded on the OTC Bulletin Board and Pink Sheets Electronic Quotation Service. Many microcap stocks trade below $5 a share as penny stocks. Many forms of microcap stock fraud exist, but the more common techniques are pump and dump schemes and selling of “chop stocks.” Chop stocks are purchased for pennies and then sold to unwary investors at dollars a share. “Boiler rooms” pursue microcap stock fraud techniques using telesales to pressure clients into fraudulent trades.
- Disclosure claims are actions by investors against publicly traded corporations where corporate officials have failed to disclose the true state of the company’s financial and business affairs to its investors. In today’s exchange-based securities trading environment, information disseminated to the market by companies and their officials often has a dramatic impact on the price of that company’s stock. Where that information is complete, accurate, and timely revealed, the impact of the disclosure of that information on the price of a security, or the value of a person’s investment, is part and parcel of the investment process. Where information has been only selectively or falsely disclosed such that a misleading picture has been painted, investors may have been wronged.
Investors in securities need to be on the guard against victimization from securities fraud. Despite the oversight offered by the SEC, securities fraud remains a problem in the United States financial markets. Accordingly, the securities fraud lawyers at Seeger Weiss LLP seek to assist victims of securities fraud to receive compensation as the result of improper and illegal securities practices. If you have been a victim of securities fraud, please contact the securities fraud attorneys at Seeger Weiss LLP.
