Overview of Securities Litigation

Securities include stocks, bonds, and other financial tools that companies use to raise capital from investors. When there are disputes between publicly traded companies, the government, or shareholders, parties can take their cases to court. Securities litigation includes securities fraud, class action lawsuits, and shareholder derivative actions.

The Securities Act of 1933 and Securities Exchange Act of 1934 regulate the buying, selling, and trading of securities. The Securities and Exchange Commission (SEC) enforces federal securities law. The SEC can take enforcement action, with civil and criminal penalties. Shareholders can also file a securities fraud claim for material misstatements or omissions. Contact a securities litigation attorney to understand your legal options and take your case to court.

What Is Securities Litigation?

Securities are financial instruments that businesses use to raise capital. Investors can use their money to invest in a company for dividends, interest, or selling the securities at a higher value. Securities litigation involves legal disputes over securities transactions.

The federal government regulates most securities transactions and enforces the law through the U.S. Department of Justice (DOJ). Much of the financial industry self-regulates through the Financial Industry Regulatory Authority (FINRA). However, FINRA still falls under federal regulatory authority.

The federal court system handles most large-scale security litigation. However, state courts may resolve some state securities disputes, including shareholder disputes for breach of fiduciary duty. Shareholders have standing to file a lawsuit against a company, board of directors, or corporate officers.

Some securities disputes must go through arbitration instead of the court process. Many securities have mandatory arbitration clauses, requiring disputes to go through alternative dispute resolution. Arbitration is generally confidential but the parties have limited options to appeal an arbitrator’s decision.

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Key Federal Securities Laws Explained

The federal government regulates most U.S. securities. Primary federal securities regulations go back to the time of the stock market crash of 1929 and the beginning of the Great Depression. The Securities Act of 1933 established mandatory disclosure requirements to inform potential investors of risks involved. This law also prohibited deceptive practices in the sale of securities.

The Securities Exchange Act of 1934 established the Securities and Exchange Commission (SEC). The SEC has regulatory authority over the securities industry, including brokerage firms, public companies, and financial institutions. This law regulates buying, selling, and trading securities.

Other federal securities laws include:

• Investment Company Act of 1940
• Private Securities Litigation Reform Act (PSLRA) of 1995
• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
• Sarbanes-Oxley Act of 2002

These laws also provide enforcement options for the SEC, DOJ, and private parties. Private parties can file lawsuits for securities fraud. Securities fraud class action combines the claims of multiple plaintiffs with similar fraud claims.

The SEC can bring civil enforcement actions through internal proceedings or federal courts. SEC enforcement remedies include financial penalties and injunctive relief. Financial penalties include fines and disgorgement of profits. Civil injunctions require company directors or officers to take certain actions or stop certain practices.

The SEC and DOJ can also take criminal enforcement action. Securities fraud is a crime, punishable by fines and prison time. Sentencing time can depend on several factors, including amount of loss, victims, and type of fraud.

Types of Securities Lawsuits

Securities litigation can involve any type of dispute related to securities, including advertising, regulations, or buying and selling. Types of securities lawsuits include:

• Securities fraud cases
• Securities class action lawsuits
• Shareholder litigation
• Material misrepresentations
• Insider trading
• Mergers and acquisitions
• Market manipulation
• Disclosure violations
• Breach of fiduciary duty

Common Forms of Securities Fraud and Misconduct

Securities fraud involves making misrepresentations to deceive investors in buying, selling, or trading securities. Examples include making false statements about a stock’s performance, returns, or risks and inducing investors into buying a security. There are many other types of securities fraud, including insider trading, market manipulation, and embezzlement.

Insider trading laws prohibit trading on non-public information. Another well-known type of securities fraud is the Ponzi scheme. In a Ponzi scheme, investors are paid out from money by new investors. Usually, there are little or no earnings from actual business activities. Investors can continue getting profits as long as new investors keep coming. As soon as the new investors dry up, the scheme collapses.

How Investors Can Recover Their Losses

Victims of securities fraud may think their money is gone and there is no way to recover their investment. However, securities litigation gives investors a claim for compensation for financial damages. Legal options include SEC enforcement actions, consumer protection laws, and private party civil claims.

The SEC can bring enforcement actions against a company, broker, or securities issuers for fraud. As part of civil enforcement actions, the SEC can issue fines and injunctions against the defrauding company. The SEC can also disgorge unlawful profits to return to investors. However, the amount of money recovered is often less than the total financial losses.

Some consumer protections laws give investors protections when a brokerage goes out of business or a company files for bankruptcy. Like FDIC insured banks, customers of registered brokers have limited insurance protection up to a certain amount of cash in their accounts if the brokerage goes out of business.

Investors and shareholders can seek to recover losses due to securities fraud or a breach of fiduciary duty. These types of private claims often develop into class action litigation when there are large groups of investors or shareholders.

When To Contact a Securities Litigation Attorney

A securities litigation attorney can review your case and explain your legal options. An attorney can refer you case to the SEC or file a private party claim against the company or brokerage.

Your attorney can also help if there is already an existing securities litigation class action case and you want to be a member or opt-out of the class. Talk to a securities litigator to find out about your legal options to recover losses related to investment fraud.