Securities Law Protects Investors From Fraud and Insider Trading

Securities law governs firms and organizations that trade stocks, mortgages, and other monetary instruments to the general public. It helps protect investors from fraud and other criminal actions while ensuring that businesses present clear and detailed data to potential buyers.

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Securities lawyers are transactional business attorneys who must understand complex regulations and financial matters. They often focus on litigation involving securities-related claims.

Issuer Oversight

A security is an intangible interest in property or an ongoing enterprise that gives rise to laws designed to prevent fraudulent practices in their sales and trading. Securities law is broad and focuses on the sale of equity interests (stocks), debt interests (bonds, notes, debentures, bills), derivatives, and exchange-traded funds. The SEC regulates the sales of these securities through investigations, administrative proceedings, and civil litigation. The agency also conducts surprise inspections of brokerage offices and reviews trading data, all of which can lead to enforcement actions. Investigations typically begin with complaints from investors or others, but the commission can initiate its own inquiries as well.

The SEC’s investigative tools include conducting information inquiries, interviewing witnesses, examining brokerage records, and issuing subpoenas. The agency can also impose monetary penalties for violations of federal securities laws. Under amendments made in 1990, the penalties can be up to $100,000 per violation for natural persons, and up to $500,000 per non-natural person. The SEC can also seek a court-imposed injunction to bar the defendant from engaging in further violations of the laws, as well as suspend or revoke the registration of a broker-dealer, deny or revoke its members’ membership on an exchange, and bar censured individuals from employment with a registered firm.

Foley’s securities enforcement & litigation trial lawyers have appeared coast to coast in matters brought by the SEC, the PCAOB, the Financial Industry Regulatory Authority, state attorneys general offices, the CFTC, and various self-regulatory organizations. They have represented public companies and their audit committees, large accounting firms, investment banks, brokers, futures commission merchants, hedge fund managers, and private equity funds.

Trading in Stocks by Directors and Officers

Whether you’re involved with an organization looking to offer securities to the public or a private investor, or are facing allegations of securities fraud, securities law protects your interests and those of all other investors by creating a framework for fair and open business transactions. Securities laws prevent fraud, insider training and market manipulation through a complex system of reporting and enforcement.

Federal securities laws require publicly-traded companies to file regular reports with the Securities and Exchange Commission (SEC) containing vital financial information including investment results, executive compensation and corporate governance. Individuals, stockbrokers and financial markets rely on this information to make investing decisions. These disclosures are intended to help ensure that investors have access to objective and easily accessible information to inform their investments.

In addition, the SEC has established a series of rules known as 10b5-1 to allow directors and officers of public companies to trade in their own company’s shares during trading blackouts provided that they pre-clear the trade with the Compliance Officer or, if they are the Chief Executive Officer or Chief Financial Officer, the Company. These plans must also include lengthy “cooling-off periods” and directors and officers must certify that they have no material nonpublic information before the plan may be used.

In the wake of recent financial scandals, there is increased interest in both state and federal securities law. Securities lawyers are transactional business attorneys who understand complicated regulations and complex financial matters. They are well-versed in the requirements for public offerings and can review your situation to recommend a strategy for moving forward.

Insider Trading

Individuals who possess confidential, material non-public information about a publicly traded company and trade in the company’s securities may be guilty of insider trading. This is a violation of the individual’s fiduciary duty as a corporate officer or director. A person who tips a friend about this privileged information and that friend makes a trade based on the tip may also be liable for insider trading. However, the person providing the tip must have a fiduciary relationship to the tippee and the tippee must have knowledge of the tippee’s relationship with the company to be liable for insider trading.

A private action can be brought against an insider by a stockholder, or the SEC may pursue civil enforcement actions including a fine of up to three times the profit gained or loss avoided from the illegal trading. The SEC can also seek to ban the violating individual from serving as an officer or director of a public company and, in particularly serious cases, may bring criminal charges against him or her.

Individuals who work with a corporation on a professional basis, such as lawyers or investment bankers, may be deemed to be insiders if they obtain confidential information about the corporation and trade in its stocks. This concept is referred to as “constructive insider” trading and was established in Dirks v. SEC, a United States Supreme Court decision.

Fraudulent Practices

Federal and state securities law prohibit fraudulent practices in the sale of financial instruments, such as stocks, bonds, treasury bills, notes, and derivatives. These are a tiny sample of the vast array of securities issued by businesses.

The Securities Act of 1933 and the Securities Exchange Act of 1934 are primary statutes governing the securities markets. They establish the SEC and empower it to regulate stock exchanges, brokers-dealers, and transfer agents. They also require companies to make public reports that, if false, could lead to sanctions and civil penalties. In addition, the SEC prohibits insider trading and other deceptive or fraudulent activities in connection with the offer, purchase, or sale of a security.

If you or someone you know has been accused of violating securities laws, it’s important to have an experienced attorney on your side. At Frank LLP, our attorneys have years of experience representing plaintiffs in securities cases, including individual investors and groups of investors, such as a class action.

A conviction for securities fraud can have a profound impact on your career, finances, and reputation. A conviction can be accompanied by a substantial fine and, in some cases, disgorgement of any illegal profits you may have made. To protect your rights, it is important to seek legal representation immediately. Our team is available to discuss your case and the options you have for a successful defense.