Securities is a general term which refers to:
- Bonds and debentures;
- Notes; and
- A variety of interests which involve an investment where the return primarily or exclusively depends on the efforts of an individual other than the actual investor.
A security is a financial instrument which represents some amount of financial value. In general, they take the form of a certificate which grants the holder rights related to the distributions of profit from a business.
Securities are typically exchanged on securities markets. Securities markets may be subject to manipulative or unfair business practices, which may include insider trading and securities fraud.
Because of these issues, securities markets are regulated heavily by both federal laws and state laws. These securities laws are designed to protect investors.
What is Securities Law?
Securities laws are laws which represent the multiple federal laws a regulations which govern security interests, including their:
- Purchase; and
Securities laws derive from one main, straightforward concept that all investors, whether they are private individuals or large institutions, should have access to certain basic facts regarding an investment before they purchase it. Individuals are only able to make sound investment decisions when they have access to information which is:
- Comprehensive; and
Securities laws were enacted because of the unique and confidential information which investors hold. These laws and regulations are designed to ensure that investors receive the necessary and accurate information which is needed to make their securities purchase.
These laws were also enacted to ensure that insiders with information regarding securities do not abuse their inside knowledge by making investments on information which has not yet been made public. The Securities Act of 1933 was enacted for two main reasons:
- Requiring that investors receive accurate financial information as well as other significant information regarding the securities which are being offered for public sale; and
- To prohibit the following in the sale of securities:
- Misrepresentation; and
- Any other types of fraud.
What are Securities Law Violations?
Each year the Securities and Exchange Commission (SEC) brings somewhere between 400 and 500 civil enforcement actions against individuals and companies which break securities laws. Typical infractions that occur include:
- Insider trading;
- Accounting fraud; and
- Providing false or misleading information regarding securities and companies which issue them.
Violations of securities laws are serious crimes which may result in incarceration and/or substantial criminal fines.
What is Insider Trading?
Insider trading occurs when transactions occur in securities of publicly held corporations by individuals who have inside or advance information on which the transaction is based. In most cases, the individual doing the trading is an insider who has an employment relationship or other type of relationship with the corporation.
For example, suppose a corporation’s employee discovers that their company plans to enter into a merger agreement with a rival competitor. If that employee, using that knowledge, purchases shares of stock with an expectation that the stock’s value will increase after the merger agreement becomes public knowledge, that employee has abused their insider status and has engaged in insider trading.
What is the Enforcement of Securities Law?
The Securities and Exchange Commission (SEC) is the agency which is empowered with the sole responsibility of enforcing securities laws in the United States. The SEC’s primary mission is to protect investors and to maintain the integrity of securities markets by requiring public companies to disclose meaningful financial and other types of information to the public so that individuals can evaluate security investments.
What Are Some Common Types of Securities Violations?
As previously noted, there are several different types of securities violations. The most common is known as securities fraud. Securities fraud occurs when an individual uses misrepresentation, fraud, or untrue statements in connection with the sale of securities.
Another common type of securities violation involves the conduct of trustees, or individuals who are charged with the responsibility of managing an individual’s securities. Brokers and trustees have a duty to manage securities in a prudent manner.
If a trustee breaches this duty, they may be liable for losses which result from the mismanaged securities. Other forms of securities violations and securities litigation may include:
- Market manipulation, which may occur when a securities company, investor, or broker engages in any activity which creates a false impression regarding a security, including its:
- availability; or
- Insider trading, which, as noted above, occurs when an individual with inside information regarding a company’s stock uses that information to gain a personal advantage on a trade;
- A breach of fiduciary duty, which may occur when a broker or trustee cannot manage the securities if another individual because they have a conflict of interest which would prevent them from remaining loyal to that beneficiary;
- Churning, which occurs when a broker engages in excessive amounts of trading in order to boost their own sales commissions. This conduct is considered to be unethical and is prohibited by securities laws;
- Unauthorized trading, which occurs when a trustee abuses their freedom to invest prudently and reasonably and engages in trading against the wishes of the stockholder; and
- Malpractice or ineptitude, which occurs when an unqualified individual holds themselves out to be a professional, such as brokering without a valid license.
The laws which govern these types of securities violations can vary according to the nature of the security which is being traded. For example, the laws governing the regulation of the trade of stocks may be very different from those which govern the trading of other types of securities.
What Are the Penalties for Securities Violations?
The legal penalties for a securities violation may be very severe. Even a minor violation may lead to criminal misdemeanor charges, which can be punished by a criminal fine and/or jail time.
More serious violations may lead to felony charges. This may include violations which involve falsifying tax information.
In addition to possible criminal penalties, there are many types of securities violations which can result in civil litigation claims. In these situations, it is common for the holder of the security to file a lawsuit against the trustee who failed to manage the security assets according to professional standards.
If the holder of the security prevails, the trustee may be required to pay damages to compensate them for their economic losses.
What Steps Can I Take to Protect My Securities Investments?
There are numerous steps an individual can take to protect their securities investments. These steps may include:
- Ensuring that the individual’s brokerage firm is licensed;
- Checking the Central Registration Depository (CRD), which contains information regarding brokers and their licensing; and
- Staying in contact with the individual’s broker.
Do I Need a Lawyer for Violations of Securities Laws?
It is essential to have the assistance of a securities lawyer for any issues, questions, or concerns you may have related to a violation of securities laws. Securities trading is strictly regulated by both federal laws and state laws.
Your lawyer can assist you if you are involved in a securities dispute or violation. They can advise you regarding the laws in your state and whether any defenses will be available to you.
If you have experienced a loss in connection with a securities violation, your lawyer can assist you with filing a lawsuit to obtain compensation for your losses. Your lawyer will represent you whenever you are required to appear in court.