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Types of Securities Violations

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What Are Securities?

Securities are financial instruments that represent some amount of financial value. They generally take the form of a certificate that grants the holder rights related to the profit distributions of a business. A few common examples of securities are stocks, bonds, and notes.

Securities are usually exchanged through securities markets. Trading markets may be subject to unfair or manipulative business practices, such as "insider trading" and securities fraud. Therefore, securities markets are heavily regulated by both federal and state laws that are designed to protect investors.

What Are Some Common Types of Securities Violations?

The main type of securities violation is known as “securities fraud”. Securities fraud happens when a party uses fraud, misrepresentation, or untrue statements in connection with the sale of a security.

Another common type of securities violations involves the conduct of trustees (persons who are charged with the responsibility of managing a person’s securities). Trustees and brokers have a duty to manage the securities in a prudent manner. A breach of this duty can make the trustee liable for losses resulting from the mismanaged securities. 

Some other types of securities violations and securities litigation claims involve:

  • Market Manipulation: This may occur 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: Persons with inside knowledge of a company’s stock activity may not use such information to gain a personal advantage on a trade
  • Breach of Fiduciary Duty: The trustee or broker cannot manage another’s securities if they have a conflict of interest that would prevent them from remaining loyal to the beneficiary
  • Churning: This is where 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: While trustees do have some freedom to invest prudently and reasonably, they generally cannot engage in trading against the wishes of the stock holder
  • Malpractice or Ineptitude: Broker malpractice may occur if an unqualified person holds themselves out to be a professional (for example, brokering without a valid license)

The laws governing these types of securities violations may vary according to the nature of the particular security being traded. For example, laws may be very different when it comes to regulating the trade of stocks versus the trade of other types of securities.

What Are the Penalties for Securities Violations?

The legal penalties for securities violations can be very severe. Even minor violations can lead to criminal misdemeanor charges, which are punishable by a fine and/or jail time. More major violations can lead to felony charges, for example, if the violation involved falsifying tax information. 

In addition to criminal penalties, many types of securities violations can also result in a civil litigation claim. It is common for a holder of securities to file a lawsuit against a trustee who has failed to manage security assets according to professional standards. The trustee may then be required to pay damages in order to compensate the plaintiff for their economic losses.

Do I Need a Lawyer for Violations of Securities Laws?

The area of securities trade is very strictly regulated by federal and state laws. If you are involved in any type of securities dispute or violation, it may be necessary for you to contact a business lawyer. An experienced attorney can research the laws in your area to determine if you have any defenses available. Or, if you have experienced losses in connection with securities, a lawyer can help you obtain compensation in court. 

Photo of page author Kristen Johnson

, LegalMatch Legal Writer

Last Modified: 05-21-2018 06:18 PM PDT

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