What are securities? Not to be confused with the alarm system and cameras installed in your home or business, a security is simply an investment in a business. A security is defined as any proof of ownership or debt that has been assigned a value and may be sold.

Securities come in many different forms including, but not limited to: stocks, bonds, options, loans, mortgages, treasury stocks, investment contracts, or fractional interests in oil, gas, or mineral rights.

Historically, in the 1920’s many companies sold stocks with promises of massive profits, but the companies did not disclose pertinent information about the company’s assets or the stock to the hopeful investors. Because of the vast amount of security fraud that transpired, the stock market crash of October 1929 occurred, causing millions of individuals to lose their investments; shortly after the great depression began.

Because of this, the United States Congress reacted by enacting federal securities laws and creating the SEC to administer the laws. These two laws are known as the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”).

The Securities Act is a federal law requiring that securities sold to the public be registered with the SEC and that complete and reliable information about the company and the stock offering be made available to any potential investors.

The Exchange Act essentially regulates the operation of stock exchanges and trading through the creation of the SEC (“Securities and Exchange Commission”). Together these group of laws compromise securities law that oversee the purchase, sale, and creation of security interests. However securities law are not only federal, but securities are also regulated by the states.

How Do State Securities Law Differ from Federal Securities Law?

State securities laws are referred to as “Blue Sky” laws, and prohibit fraud in the sale of securities, registration requirements for securities to be sold within the state, registration requirements for brokers and dealers, sanctions, and civil liability.

“Blue Sky” laws serve as an additional regulatory layer to federal securities laws, and require registration requirements not only in the home state of the broker or dealer, but every state in which they seek to do business with securities.

The intent of state securities law is to ensure that potential investors are given reliable information on the securities and that material information that may affect the security be disclosed. Each jurisdiction within a state may have different filing requirements for registering offerings, thus, it is important to reference your jurisdiction’s requirements.

What is Securities Fraud?

Securities fraud arises when a business or person attempts to unlawfully manipulate the investment market through fraud used in connection with the sale of a security. Corporations, private investors, financial advisors, dealers, brokers, and analysts may all illegally attempt to manipulate the market for profit.

For example, the Enron case in 2001 was sparked by deceptive accounting practices that significantly overvalued the company, resulting in over inflated stock prices, which were unknown to its shareholders and investors. Securities fraud is prosecuted under civil and administrative actions brought the SEC.

Fraud on the level of Enron may also be subject to criminal charges, such as those brought upon Enron executives. Enron is a classic case of corporation fraud, which occurs when a company deliberately changes or conceals information so that they appear to be successful, when in reality they usually are not.

Other types of securities violations and securities litigation claims involve:

  • Market Manipulation: This security violation occurs when a securities company, broker, or investor engages in any activity creating a false impression regarding the price, availability, or distribution of a security;
  • Insider Trading: This security violation occurs when persons with inside knowledge of a company’s stock activity use such information to gain a personal advantage on a trade;
  • Breach of Fiduciary Duty: This security violation occurs when a trustee or broker manages another’s securities and has a conflict of interest that prevents them from remaining loyal to the beneficiary;
  • Churning: This security violation occurs when the broker engages in excessive amounts of trading in order to boost their own sales commissions. This is considered unethical and is prohibited by securities laws;  
  • Unauthorized Trading: This securities violation occurs when brokers engage in trading against the wishes of the stockholder; or
  • Malpractice or Ineptitude: This security violation typically occurs when a person holds themselves out to be a professional broker, when in reality they are not.

What are Securities Class Action Lawsuits?

Securities class action lawsuits are typically brought on behalf of a group of investors who lost money due to a securities law violation. For instance, in the Enron case, the executives of the company made misleading and false statements about the nature of the company and the valuation of its stock, causing potential investors to buy their stock at a higher price. However, Enron was not as stable as the executives claimed it was. The investors all brought a class action lawsuit against Enron for a securities law violation and were awarded a $7.2 billion settlement paid out by the banks accused of participating in the accounting fraud scheme.

Should I Contact an Attorney about an Issue Related to Securities Laws?

As can be seen, navigating securities laws is sometimes a very complicated matter. A well qualified and experienced securities lawyer will be able to counsel you in raising capital for your company or counsel you as an individual investor if you believe your investment was mishandled or you were misled in your investment. Additionally, a securities lawyer may represent you in front of a court of law, if necessary.