Securities law is an extremely specific field within the realm of legal practice. Its clients are primarily investors, brokerage firms, and financial institutions.
Some of the most common violations involve insider trading and accounting irregularities. Other violations include misrepresentation, fraud, and misconduct. The penalties collected by the SEC from these cases are used to compensate victims and whistleblowers.
Misrepresentation
A misrepresentation is misleading another party, which can void a contract and lead to damages. Misrepresentation can occur when a party gives inaccurate information that influences the other party’s decision-making and causes them to enter into a contract they would not have otherwise agreed to. Misrepresentation can be intentional or unintentional.
A typical example involves insider trading, where a person has access to material nonpublic information and sells their company’s stock before the news hits the market. This can violate the Securities Act and Rule 10B-5, which prohibits using any “device, scheme, or artifice to defraud” investors.
The SEC investigates potential violations and, when appropriate, brings civil charges against firms and associated persons. In addition, the SEC can get criminal cases when it receives evidence of fraud or other willful or reckless misconduct. The SEC often refers patients to the Department of Justice for prosecution. When this occurs, the government may bypass the typical investigative process and move quickly toward seeking indictments from a grand jury.
Fraud
Securities fraud is a federal white-collar crime, punishable by up to 20 years of incarceration and significant fines. Federal prosecutors prosecute securities and commodities fraud with great vigor, and defendants must have a solid defense to a securities law violation charge from the beginning of their case.
The primary criminal statute regulating securities and commodity fraud is 18 USC SS 1348, which makes insider trading and fraudulent accounting criminal offenses. The law also provides for civil penalties, disgorgement (return of ill-gotten gains), and restitution to investors.
When individuals trade in company stock, they must file reports with the Securities and Exchange Commission (SEC). Directors, officers, and large shareholders are scrutinized for their role in a public company’s business. The law prohibits them from engaging in “any device, scheme, or artifice to defraud.”
A Wells Notice often initiates the SEC’s enforcement activities. This somewhat nebulous boilerplate document simply recites which statutory provisions the SEC suspects have been violated without any detail about the nature of those violations. Individuals, companies, and even professional firms targeted by a Wells Notice must carefully review their options and retain an experienced securities attorney.
Malfeasance
Malfeasance is a term that describes acts that are unequivocally illegal or wrongful. It is distinct from Misfeasance, which refers to a wrongdoer’s failure to fulfill their legal duty, and Nonfeasance, which refers to a perpetrator’s negligence that causes injury or damage.
Securities laws are enacted to ensure that investors receive accurate information regarding securities and companies which issue them. Providing false or misleading information is a serious crime that may result in incarceration and substantial criminal fines.
The SEC has several statutory enforcement powers to punish alleged securities law violations. It collects penalties, disgorgements (returning ill-gotten gains), and other damages from those who violate federal regulations. Most of these funds are used to return money to investors harmed by the transgressions.
To prove a fraud claim, an injured party must show that the defendant made a misrepresentation with the express intent to deceive them and that they reasonably relied on that misrepresentation in making their investment decisions. New York General Business Law Article 23-A and the Martin Act are the State’s primary laws prohibiting fraud in the sale of securities.
Irregularities
Generally, a security is defined as any fungible and negotiable financial instrument with monetary value. Securities include stocks, bonds, options, futures contracts, and commodities such as gold or oil traded on open markets.
Violating federal or State securities laws is a crime and can be punished by fines or even imprisonment. Securities law violations can involve a wide range of activities and actions, including misrepresentation, fraud, manipulation of market prices, insider trading, and breaches of fiduciary duty by broker-dealers and investment advisors who must put their client’s best interests first when making recommendations.
The Securities and Exchange Commission’s (SEC) Division of Enforcement conducts hundreds of investigations annually, many initiated from the SEC’s Wells Notice process. These are fairly boilerplate letters that cite the statutory provisions the SEC believes have been violated without any detailed description. Investigations can also be opened through tips, customer complaints, examination findings, filings, referrals from other SEC departments, and media reports.
Malpractice
Securities law refers to a set of federal statutes that regulate the sale, issuance, and trading of financial instruments. It is designed to prevent fraud and market manipulation while promoting transparency and accountability. It is administered by the Securities and Exchange Commission (SEC).
The SEC often investigates allegations of securities violations by launching enforcement proceedings. It can interview witnesses, examine records and inspect brokerage firms to gather evidence. It also has the power to file subpoenas in court. Its most common leads are complaints from investors and other parties. The SEC can also launch a probe on its initiative by issuing what is known as a Wells Notice. This somewhat nebulous notice usually recites the statutory provisions it suspects were violated without offering much detail.
Criminal allegations of securities law violations are serious and carry severe penalties. These cases require an experienced attorney who can keep abreast of all current federal and State regulations and legislation while demonstrating a proven track record in helping clients recover losses resulting from corporate wrongdoing.
