Securities Law FAQ

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 The History and Importance of Securities

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

Securities come in many different forms, including stocks, bonds, options, loans, mortgages, treasury stocks, investment contracts, or fractional interests in oil, gas, or mineral rights.

In the 1920s, 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 hopeful investors. Because of the vast amount of security fraud, the stock market crash of October 1929 occurred, causing millions of individuals to lose their investments just shortly after the great depression began.

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 register with the SEC. Complete and reliable information about the company and the stock offering was required to 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 groups of laws compromise securities law that oversees the purchase, sale, and creation of security interests. However, securities laws are not only federal. The states also regulate securities.

How Does State Securities Law Differ from Federal Securities Law?

There are numerous federal and state laws that apply to publicly-traded companies. The laws are designed to protect shareholders and investors. The laws also enforce compliance.

Federal law requires publicly-traded companies to file reports with the SEC. These reports contain information about a company’s financial condition, their operating results, and the compensation their executives are paid. Investors and brokers rely on the accuracy of such information to shape their investment decisions. Federal law prohibits the use of insider information for personal gain or market manipulation.

State securities laws are referred to as “Blue Sky” laws. They prohibit fraud in selling securities. The laws include 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.

State securities law intends 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. 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 to sell a security. Corporations, private investors, financial advisors, dealers, brokers, and analysts may 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 overinflated stock prices, which were unknown to its shareholders and investors. Securities fraud is prosecuted under civil and administrative actions brought by 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 corporate fraud, which occurs when a company deliberately changes or conceals information to appear to be successful when in reality, they usually are not.

Other types of securities violations and securities litigation claims include:

  • 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 trading to boost their 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 company’s executives made misleading and false statements about its nature and its stock’s valuation, 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 brought a class action lawsuit against Enron for a securities law violation. They 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?

Securities lawyers can help you protect your investments. Given the extent of harm caused by securities fraud, securities lawyers have become an important asset for consumers. Securities law is becoming increasingly relevant in our technologically-driven world.

Securities lawyers specialize in the complex and changing laws and regulations involving financial investments. A securities lawyer can provide significant benefits to you as you plan your investments. A securities lawyer may also help you recover any losses from wrongdoing.

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. If you believe your investment was mishandled, a lawyer can counsel you as an individual investor. Additionally, a securities lawyer may represent you in front of a court of law, if necessary.

As you plan your investments, securities lawyers can assist in researching companies’ financial history and health based on their reporting.

Securities lawyers can also represent you in any litigation arising from your investments. This may include a shareholder’s derivative action, a class-action lawsuit, or a suit against your broker. Because many broker agreements contain arbitration clauses, you may be limited in your ability to pursue an action against your broker in court. You may consider having a securities lawyer review and explain any broker agreements with you before you sign them.

Securities lawyers also frequently represent corporate clients in the transactional work involved with initial public offerings, private sales of securities, stock issuance, or other securities with mergers and acquisitions. Securities lawyers may also assist companies in complying with securities laws and regulations.

Use LegalMatch’s services today to speak with an attorney specializing in securities law. There is no fee to schedule a consultation.


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